Market movers today
The ECB minutes from the March meeting will be scrutinised for any hints and discussions within the Governing Council of the ECB contemplating hiking rates before a termination of the QE programme. It is still our expectation that the ECB will not hike before the termination of the QE programme, which we expect to be extended into next year.
German factory orders for February are due out. Recent months have shown great volatility in factory orders, with the latest figure being a 7.2% monthly drop in January. We estimate a monthly increase of 4.2% following the weak January figure.
President Trump will start a two-day meeting with Chinese President Xi Jinping.
Selected market news
In the US, yesterday’s FOMC minutes did not give us much new information in terms of the economic developments as the message of a central bank on track delivering one of the three signalled hikes in 2017 was reiterated. However, the Fed staff seems to have changed its risk assessment on the timing of fiscal easing from the Trump administration amid the Republican’s failure to change Obamacare. Our base case remains that the Fed hikes in July and December and then three to four times next year, but this call is dependent on the speed and size of a possible balance sheet reduction (see next paragraph).
Meanwhile, the minutes gave us more insight into the discussion behind the Fed’s balance sheet reduction. The minutes say that ‘a change to the Committee’s reinvestment policy would likely be appropriate later this year’. We expect the Fed to begin shrinking its balance sheet in Q1 18 – consensus among both primary dealers and analysts is mid-2018 – but risk is skewed towards the end of this year. We think an announcement is likely in connection with the June meeting. The FOMC members still want quantitative tightening to be ‘conducted in a passive and predictable manner’. The participants also discussed whether the timing of quantitative tightening should be based on a quantitative threshold or on a qualitative judgement. Based on the minutes, ‘several’ participants prefer the former while ‘some’ prefer the latter meaning that quantitative tightening would likely depend on the Fed funds target range or the level of an economic variable (possibly the PCE inflation rate or the unemployment rate). We have written intensively on quantitative tightening recently. Rising demand for currency, change in US treasury cash balance policy and financial regulation limit the scope for a reduction of the balance sheet in our view. Risk is that quantitative tightening could lead to an unwarranted tightening of USD liquidity which adds a risk to our Fed rate call. On the data front in the US, the ADP labour market report of +263K job growth in March beat expectations suggesting some upside risk to the nonfarm payrolls release on Friday.
Yesterday’s Norwegian house price statistics from Eiendom Norge revealed a March rise of 0.3% m/m s.a. bringing the yearly rate down from 13.0% to 11.7%. We note the yearly rate in Oslo dropped 1.6pp from a record high to 22.4% (see tweet). Overall, the release clearly showed signs of a cooler housing market, which is likely to be a reflection of not least a supply side adjustment and new regulatory initiatives introduced from the New Year now taking effect. While the national average has now dropped below Norges Bank’s forecast for the first time in many months, we think it is important to highlight that Norges Bank already has a significant slowdown in house prices this year. So, the release reduces the probability of a rate hike rather than increasing that of a rate cut, in our view.
